Discounted Cash Flow Valuation for Small Cap M&A Integration*

Frank Batten rose to the upper ranks of the Forbes 400 by using his Norfolk newspaper as a base to consolidate publications and then later to create a media enterprise, including cable‐TV (which was eventually sold for $1.2 billion) and The Weather Channel (sold for over $3 billion). Batten's success offers a compelling case study of the often pursued but much maligned “roll up” strategy of mergers, providing evidence that the strategy can produce superior returns for those consolidators devoted to integrating small, value‐priced acquisitions within an industry niche. The author identifies three keys to Batten's success in making the strategy work: (1) aggressive, but astute, adoption of “best practices” and enhanced processes; (2) refinement of the business model to “roll out” the launch of like entities to underserved markets; and, most important, (3) identification and pursuit of innovative business development opportunities made possible by the consolidation. Too often, intricate discounted cash flow (DCF) analyses are used to justify disastrous valuations, such as the one that helped support Daimler's $37 billion acquisition of Chrysler. Landmark's employment of rigorous DCF analyses was valued primarily not as a guide to value, but rather as a way of assessing the economic drivers of the business, the opportunities to control costs, the rationality of forecasted growth rates, and the probability of competition and market forces affecting short‐ and longterm results. These analyses formed the basis for management's long‐term development goals. When seeking approval for a deal, however, the valuation depended on a simpler criterion: the multiple of the prior year's cash flow relative to prospective long‐term profit growth. In this regard, Batten's use of DCF was much more akin to Warren Buffett's “spontaneous” valuations, delivered “customarily within five minutes.”     

Tax-subsidized underpricing: The market for Build America Bonds

Build America Bonds (BABs) were issued by municipalities for 20 months as a part of the 2009 fiscal package. Unlike traditional tax-exempt municipals, BABs are taxable to the holder, but the Treasury rebates 35% of the coupon to the issuer. The stated purpose was to provide municipalities access to a more liquid market including foreign, tax-exempt, and tax-deferred investors. We find BABs do not exhibit greater liquidity than traditional municipals. BABs are more underpriced initially, particularly for interdealer trades. BABs also show a substitution from underwriter fees toward more underpricing, suggesting that the underpricing is a strategic response to the tax subsidy.     

Modeling Accounting Workplace Interactions with Text‐to‐Video Animation

This article describes a new pedagogical tool, text‐to‐video animation software, that accounting instructors can adopt to easily generate quality videos that address a variety of accounting learning objectives. Although this tool can be used to enhance traditional pedagogical methods, such as case analysis and discussion, it can also be used to address accounting learning objectives not currently addressed by traditional pedagogical methods. This article outlines the benefits of adopting and using this tool in financial and managerial accounting courses, and encourages further study of its effectiveness.     

Financial Intermediation and the Costs of Trading in an Opaque Market

Municipal bonds trade in opaque, decentralized broker-dealermarkets in which price information is costly to gather. We analyzea database of trades between broker-dealers and customers inmunicipal bonds. These data were only released to the publicwith a lag; the market was opaque. Dealers earn lower averagemarkups on larger trades, even though dealers bear a higherrisk of losses with larger trades. We estimate a bargainingmodel and compute measures of dealer’s bargaining power.Dealers exercise substantial market power. Our measures of marketpower decrease in trade size and increase in the complexityof the trade for the dealer. (JEL G0, G24)     

Stock investments for German life insurers in the current low interest environment: more homework to do

Currently a stock market rally and at the same time extremely low interest rates can be observed. This coincides with more volatile risk premiums for interest baring assets like government bonds. The mixture makes life harder for investment managers of (especially life) insurances. They have to continuously find profitable investments with good returns for the customers’ money, in case of the life insurers, in order to be able to pay at least the promised returns of the contracts. After the stock market burst around the turn of the century the levels of stock investments by German insurers have declined significantly, therefore also missing out on the rises leading up to the Lehman crash and also not participating in recent developments. With insurance asset managers avoiding stocks in the past years the questions can be raised, if they are forfeiting a good opportunity for their portfolio and if there is still time to participate in possible future gains. On the other hand the upcoming regulatory environment, namely Solvency II, will play an important role in the future and likely already has an impact on the investment decisions of the companies. Higher capital requirements for stock investments make it even harder to earn the so-called “Garantiezins”. Without ignoring the risks related to stock investments, effectively banning equities from asset managers’ buy lists might lead to missing out on desperately needed returns for the life insurance industry. So policy makers probably should reconsider their directives. This paper evaluates the attractiveness of stock investments from a long term as well as a risk adjusted perspective using e.g. different indicators and commonly used measurements for stocks with a rather conservative focus, in order to possibly get some insight into the future performance of stocks. Looking back to a decade of boom and bust cycles in the equity markets does not necessary rule out stocks as an important source for returns. The results are discussed comprehensively also in face of the regulatory changes to come. In the end timing plays a major role and due to that the current valuation of stocks as well as the look ahead are of vital importance. Assessing the reliability of professional forecasts for financial market time series—in this context especially for stocks as well as interest rates—plays an important role for asset managers.     

Taxpayers' Behavioural Responses and Measures of Tax Compliance ‘Gaps’: A Critique and a New Measure

The work of Feldstein (1995 and 1999) has stimulated substantial conceptual and empirical advances in economists' approaches to analysing taxpayers' behavioural responses to changes in tax rates. Meanwhile, a largely independent literature proposing and applying alternative measures of tax compliance has also developed in recent years, which has sought to provide tax agencies with tools to identify the extent of tax non‐compliance as a first step to designing policies to improve compliance. In this context, measures of ‘tax gaps’ – the difference between actual tax collected and the potential tax collection under full compliance with the tax code – have become the primary measures of tax non‐compliance via (legal) avoidance and/or (illegal) evasion. In this paper, we argue that the tax gap as conventionally defined is conceptually flawed because it fails to incorporate behavioural responses by taxpayers. We show that conventional tax gap measures, which ignore the presence of behavioural responses, exaggerate the degree of non‐compliance. This potentially applies both to indirect taxes (such as the ‘VAT gap’) and direct (income) taxes. Further, where these conventional tax gap measures motivate reforms designed to increase the tax compliance rate, they will likely have a tax‐base‐reducing effect and hence generate a smaller increase in realised tax revenues than would be anticipated from the tax gap estimate.